A year or so ago, I described the market as being a
video game. Now we know the name of the game: Survivor.

The Dow Jones and the S&P 500 averages finished
the quarter at around the same level they held two full years ago. Just
the trajectory is different. Remember 1999 when people bragged about their
NASDAQ gains? They fell silent in 2000 as those profits vanished, and
today they are under water on their holdings. The "tech wreck"
continues.

And remember how bondholders suffered in
1999? It turns out that everyone should have jumped into bonds during that
year, as that asset class outperformed all others.

Where you are invested has been of unique
and particular importance of late. While the whole stock market has sagged, it has
still been a tripartite market: the NASDAQ resides some 60% below its
level of a year ago, the S&P has lost more than 22%, and the stodgy old Dow
Jones Industrials leads the pack, down "only" about 9.5%.

Where might we go from here? I would note
that for thirty years, from roughly 1930 to 1960, stocks yielded more than
bonds. Get out your calculator and figure out at what levels bonds and
stocks would have to be to replicate that situation.

Through it all, due to a fortuitous mix of
"old economy" stocks, convertibles and bonds, we have weathered the
storm quite nicely, with my accounts, on balance, ending the period with
marginally positive
returns.

It is very important to identify exactly what it is
you hope to accomplish when investing your money. Too many people these
last few years have simply plunged in. They regarded the stock market as a
competition. Just who or what are they competing against? I cannot
tell you how many people I have spoken with lately who had significant assets at
the market top and now have around half of that amount left. They had won
the prize, but they pawned the trophy.

In 1998 and 1999 all anybody could talk about was
Home Depot, Cisco, and JDS Uniphase. When I advocated taking some of that
money out, putting it aside, building a "safe money" account, they
laughed at me. Today I am getting inquiries from a large number of those
same people, and they are asking me about bonds. To a man, they are
saying, "...eight or ten percent is a pretty good return. If I could
do that every year...." Not exactly the song they were singing a
scant year ago.

They held those high-P/E stocks through their large
runups and then through the decline, and now are negative versus their cost
basis. There is a lesson here: It is exceedingly rare when a P/E of
50 or more is justified. Valuation is the name of the game, today and
always.

I did not say "value", incidentally, but
rather valuation. To my mind the proper way to invest is to identify
quality companies that you expect to grow over the next five to ten years and to
buy their stocks when they are reasonably priced.

It is in identifying a reasonable price for a
specific company that the labor lies. To then select from that list the
companies that will outperform the overall market is truly a feat worthy of a
magician.

It is just this complexity that early in my career
led me to become a long-term investor. As I have said on numerous
occasions, if you buy a quality company at a reasonable price, over the longer
term you will be pleased with the result. No one can tell you how long the
term will be, and I can assure you that the course will not be straight
up. But I have learned patience, and I suggest that all investors would be
well served in adopting this attitude.

Having realistic goals is also important. For
me, finding a convertible bond that will yield me 10% or 15% per annum for the
next four or five years is very exciting. I don't really care what the Dow
Jones or the S&P does. I just want to earn a little more than I need
every year.

The second half of the 90's was an exhilarating
period, but it is over. In my opinion, we are not likely to see another
run of that magnitude for many years. If this view is accurate, then a
return to a more fundamental examination of values is warranted. I, for
one, would welcome this new paradigm.